Steady The Price Floor

The 2002 Farm Act consists of new programs, changes to existing programs and a new system of payments. But what does it do for managing risk?

“If prices are extremely low, the counter-cyclical payment (CCP) provides a safety net,” says Robert Craven, director of the Farm Financial Center at the University of Minnesota.

CCPs are intended to replace most ad hoc market loss assistance programs that were provided to farmers from 1998 to 2001. CCPs become available this marketing year (Sept. 1-Aug. 31) whenever the national average farm price falls below $2.32/bu for corn and $5.36/bu for soybeans. The maximum CCP is 34¢ for corn and 36¢ for soybeans.

“For those growers who were around in the late ‘80s and early ‘90s, it is similar to the loan deficiency payment (LDP) of those times,” says Kent Thiesse, county extension director with the University of Minnesota, based in Mankato. From a marketing standpoint, “the difference between counter-cyclical payments and LDPs is that an LDP is short term. You make your marketing decisions the day the market occurs. Counter-cyclical payments are based on 12 months of prices and finalized post harvest.”

Basically, the CCP reinforces the price floor for corn and soybeans established by the loan rate. That allows producers to more aggressively market crops when prices are above the loan rate. But perhaps more importantly, it also allows producers to be more patient when prices are lower. Growers know if prices remain low, a certain amount of income is guaranteed through the two government programs.

For example, as of mid-November 2002, prices were hovering slightly above the loan rate. At those prices, “I've got no downside,” says Ed Usset, grain marketing specialist at the University of Minnesota. “I've got the loan rate (for price protection) if I lay a big egg.”

“I'm into preharvest sales, but only if I can get more than the loan rate,” Usset says. “I sold half my crop at harvest, and I'm saving half of it.”

As for the 2003 crop, Usset advises using the same strategy. “Right now, 2003 soybean prices are 20-30¢ below the loan, so I'm doing nothing for next year. I'll start pricing at a new crop price of $5.05.”

Because of the safety net provided by government programs, Usset is able to be patient with marketing decisions and wait for what he expects will be higher prices. If prices fall, he knows government payments will help offset the losses.

He bases his outlook on what he expects will be a change in planted acreage this year.

“There has been a shift into beans from wheat, and I see a reversal in those fortunes at current prices,” Usset adds.

Thiesse agrees with Usset's marketing strategy. He thinks farmers should look at where market prices are relative to the loan rate and make market plans accordingly. “The counter-cyclical payment becomes very secondary,” he adds.

But CCPs aren't a rock-solid guarantee, Thiesse cautions. “When you get volatile markets, you need to pay some attention to the counter-cyclical payment.”

If CCPs would have been in place a year ago, he points out, a grower might have chosen to pre-sell the 2001 crop early in the year, thinking he would receive the maximum payment. As it turns out, however, the market later rallied and there would have been no payment. In fact, the earlier payments may have had to be repaid.

CCPs are possible three times during the marketing year: An advance after harvest, another in February and the final payment in October. If a payment is made in February and prices rise going into harvest, there's always the potential a farmer would have to pay some back in the end.

For this reason, Thiesse advises farmers to treat the counter-cyclical payment similar to a market loss payment. Then it shouldn't impact cash flow plans too much.

To receive payments on crops covered by the new farm program (wheat, corn, grain sorghum, barley, oats, rice, upland cotton, soybeans, other oilseeds and peanuts), a producer enters into annual agreements for crop years 2002-07. At enrollment, producers must select between two options for determining base acres and between three options for determining payment yield.

Farmers have two options for designating base acres:

Choose base acres equal to contract acreage for the commodity that would otherwise have been used for 2002 Production Flexibility Contract (PFC) payments plus average oilseed plantings in 1998-2001, so long as base acres do not exceed available cropland, or Update base acres to reflect the four-year average of acres planted, plus those “prevented from planting” due to weather conditions, during the 1998-2001 crop years.

Each producer must select one of the two options to apply to all covered commodities for both direct and counter-cyclical payments. Payment acres are equal to 85% of base acres for all covered crops.

Owners of farms will have a one-time opportunity to select a method for determining base acreage. An owner who fails to make an election shall be considered to have selected 2002 PFC contract acres and, for oilseed base, the four-year average of oilseed plantings.

• Eliminates all 2002 existing PFC base acres • Establishes new base acres for eligible program crops, according to the four-year average planted and prevented planted acres from 1998 to 2001 • Only option that allows “proven yields” to update counter-cyclical payment yields • Only option on farms with no program history

NOTES: “PFC” refers to existing “production flexibility contract” base acres and payment yields that are in effect with the 1996-2002 Farm Program — A “PFC offset,” means that some existing PFC base acres are given up to add soybean or oilseed base acres — Added soybean and oilseed base acres can not exceed 1998-2001 average planted acres. — The yield update option chosen for “counter-cyclical” payment yields in option 4 must be used for all program crops. — Source: Kent Thiesse, University of Minnesota Extension Service